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Europe in danger from adverse demographics

Demographics are a vital element between environmental, social, and governance (ESG) factors increasingly important for credit analysis. 

Population trends influence multiple long-term drivers of government debt sustainability, from productivity to health spending to capacity for long-run investment.

Given the significance of demographics, it is more than academic attention to see such significant differences in projections among official institutions. Moreover, big question marks predominate over their underlying assumptions.

Minimizing the influence of demographics on EU economic structures could be combined by policy inertia. Therefore undermining the abilities of governments to make their economies accordingly.

The analysis raises questions circling EU aging and migration forecasts

Analysis of long-run population predictions from the UN, the European Commission, and the OECD on the EU-4 – Germany, France, Italy, Spain, raises questions circling forecasts relating to developing dynamics and migration. It is more important for some countries than others.

All institutions acknowledge that EU economies face contracting working-age populations and quickly aging dynamics over the coming years. Nevertheless, wide discrepancies in these forecasts and slightly optimistic assumptions encompassing fertility rates and migration trends present significant downside risks to extended baseline scenario results.

Without 1m people in net migration every year until 2060, the European Commission’s economic baseline, the EU’s working-age population would reduce 30% (80m people). The old-age dependency ratio would increase to 70%. Including migration, the working-age population declines (only) 16%, and the old-age dependency ratio will hold 60%.

Germany, Italy, and Spain more imperiled than the US, UK, and France

Germany, Italy, and Spain are more exposed to unfavorable demographic dynamics than the US, the UK, and France. The study also proves that other large economies like Japan and China are exposed to adverse demographics.

Most advanced economies meet meaningful difficulties connected with aging populations in the years ahead. The consequence will be more pronounced contingent upon migration patterns.

Significant variations in demographic estimates of institutions

The state of Spain is most representative in comparing the forecasts of the European Commission, the OECD, and the UN. At the same time, variations in projections over these institutions are less marked. However, this happens only in cases of Germany and France while still sizeable for Italy.

For Spain, the working-age population will contract by about 10-15pp from today by 2060 under baseline scenarios of the European Commission and the OECD, but by more than twice this figure as stated by the UN’s “medium-variant” scenario. This also points to significant differences in old-age dependency ratio estimates. The Commission and OECD forecast an old-age dependency ratio of about 60% by 2060, but the UN’s baseline is nearly 80%.

These differences are essential with critical suggestions for countries’ long-run economic and fiscal sustainability.

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